On 31 March 2015, ESMA published its 12th Q&A on EMIR implementation.
Since the previous Q&A dated 24 October 2014, ESMA provided further clarification on the following issues:
- Intragroup transactions
- Status of sovereign funds
- Pension Scheme exemption from the clearing obligation
- Frontloading requirement and intragroup transactions exemption
- Clearing obligation in relation with trade novations
- Third Country contracts RTS
- Interposition of the CCP between clearing members
- CCP paying VM in respect of an individually segregated client account
The new entries mostly represent slight clarifications, with perhaps the exception of the wide interpretation regarding trade novations and the numerous issues pertaining to guarantees in the Third Country contracts RTS. In addition, the two CCP questions may justify a second look at the CCP rule books and the practice of clearing members.
The Q&A updates are reproduced in full below.
Intragroup transactions (Q.6)
Q On which day does the 30 calendar day period referred to in EMIR Article 4(2) start?
A The 30 calendar day period starts on the calendar day following receipt of the notification by the relevant NCA(s).
Q When counterparties established in two different EU member states apply for an intragroup transaction exemption from the clearing obligation to their national competent authorities (NCAs) under article 4(2)(a) of EMIR and the NCAs disagree on whether the conditions laid down in Article 3 are met, can the counterparties rely on the exemption?
A No. Where either counterparty is notified during the 30 calendar day period following application that one NCA objects to the exemption, firms should not rely on the exemption, whether during or after the 30 calendar day period. For the avoidance of doubt, if counterparties apply to their respective NCAs on different dates, they should wait until the end of the later of the two 30 calendar day periods before relying on the exemption (provided neither NCA objected). Counterparties may reapply for the IGT exemption from the clearing obligation once they have addressed the objection(s) raised by the objecting NCA(s).
Status of sovereign funds (Q.13)
Q Do sovereign wealth funds established in third countries fall within the scope of application of EMIR? If so, do they qualify as financial counterparty or non-financial counterparty?
A Sovereign wealth funds established in third countries are not exempted from the scope of EMIR. As clarified in OTC Q13(c), an exemption which is designed for entities established in the Union cannot be extended to equivalent entities established in third countries.
A sovereign wealth fund will qualify as financial counterparty under EMIR where it meets the definition of an AIF and it would be subject to Directive 2011/61/EU (AIFMD) if it was established in the Union.
However, where a sovereign wealth fund does not meet the definition of an AIF and is out of scope of the AIFMD, such a sovereign wealth fund shall be treated as non-financial counterparty in accordance with Article 10 of EMIR.
This would typically be the case e.g. where a sovereign wealth fund has a single investor or supports the social security and pension systems of a third country. To determine whether such a third country sovereign wealth fund is a NFC+ or NFC-, a counterparty shall follow the process described in OTC Answer 13(b).
Pension Scheme exemption from the clearing obligation (Q.16)
Q If pension scheme arrangements, as defined in Article 2 (10) EMIR are granted an exemption under Article 89 and outsources management of its assets to a third party, either by way of delegation or through the purchase of a third party managed vehicle, will the assets still benefit from that exemption?
A The exemption is granted to the pension scheme arrangements, in consideration of the nature of the activity, therefore the fact that the assets are not managed wholly and directly by the pension scheme arrangement does not prejudice the status of that exemption. However, when a third party asset manager, manages assets from an exempted pension scheme arrangement, it should do so in a way that:
a. does not comingle exempt and non-exempt assets;
b. the derivative contract clearly identifies that it is concluded for an exempt pension scheme under Article 2 (10) and Article 89(1) & (2) (as appropriate);
c. keep the assets and records in a way to allow regulators to check that the derivative contract reduces investment risks directly related to the financial solvency of the pension scheme.
Frontloading requirement for the clearing obligation and intragroup transactions exemption (Q.17)
Q If a counterparty enters into a contract during the frontloading period and is subsequently granted an exemption from the clearing obligation which covers this contract, will the counterparty be required to clear the contract when the clearing obligation takes effect?
A No, provided that the intragroup exemption is granted before the clearing obligation takes effect.
Clearing obligation in relation with trade novations (Q.20)
Q Article 4(1)(b) of EMIR requires to clear the OTC derivative contracts (pertaining to a class of OTC derivatives that has been declared subject to the clearing obligation) that are entered into or novated either on or after the date from which the clearing obligation takes effect or during the frontloading period detailed in Article 4(1)(b)(ii) and under certain conditions. What type of trade novations are covered in this article?
A All types of trade novations are covered, i.e. each time a counterparty (being a CCP or another counter-party) steps into the trade and become a new counterparty to the trade.
Responsibility Art 2.1 of RTS on Third Country contracts (Q.21)
Q Which entity is responsible for assessing whether an OTC derivative contract would be covered by the “guarantee limb” of the RTS on Third Country contracts (i.e. Article 2(1) of Commission Delegated Regulation (EU) No 285/2014 of 13 February 2014) and for compliance with any obligations under EMIR arising as a result of the application of the RTS on Third Country contracts?
– the guarantor, the third country entity whose liabilities are covered (the “guaranteed entity”) or the third country beneficiary of the guarantee?
A The regulation applies within the Union and the EU financial entity granting the guarantee is responsible for assessing whether the conditions are met for the regulation to apply and for ensuring that the relevant EMIR requirements are met. For this purpose, it can arrange the relevant procedure (e.g. a notification) with the guaranteed third country entity in order to get the information and data it needs to perform the assessment and ensure compliance.
Article 2.1 of RTS on Third Country contracts – Conditions – cumulatively or singly? (Q.22)
Q In the following three cases in which a single guarantor gives several guarantees, should these guarantees be considered cumulatively or singly for the purpose of assessing whether the conditions in Article 2(1) of the RTS on Third Country contracts are met?
(case a) Guarantee A over Guaranteed Entity A’s liabilities to Beneficiary A and Guarantee B over Guaranteed Entity B’s liabilities to Beneficiary B, where the two guarantees are unrelated, except that they have the same guarantor.
(case b) Guarantee A over Guaranteed Entity A’s liabilities to Beneficiary A and Guarantee B over Guaranteed Entity A’s liabilities to Beneficiary B.
(case c) Guarantee A over Guaranteed Entity A’s liabilities to Beneficiary A and Guarantee B over Guaranteed Entity A’s liabilities to Beneficiary A.
A (case a) Without prejudice to Article 3 of the RTS on Third Country contracts, the conditions should be read separately for each guarantee. The two third country entities are different for each of the guarantees described.
(case b) Both guarantees should be looked at in conjunction because they both could involve exposure on the EU guarantor in relation to a single guaranteed entity as otherwise the multiplication of guarantees could allow circumvention of the provision.
(case c) The conditions should be read by taking the two guarantees together.
Third Country contracts – Effect on existing trades (Q.23)
Q Does the RTS on Third Country contracts apply to OTC derivative contracts concluded before the date of entry into force of the RTS?
A No and this answer is also set out in paragraphs 44 and 45 of ESMA’s Final Report dated 15 November 2013 on the RTS.
Q Does the RTS on Third Country contracts apply to OTC derivative contracts made after the entry into force of the RTS, but covered by a guarantee which meets the conditions set out in the RTS which was provided before the entry into force of the RTS?
A Yes and the last paragraph of Article 2(1) expressly contemplates that application. If there is a change in some of the inputs to the calculation against the threshold, i.e. the inclusion in a guarantee of an additional existing trade or an increase in the amount of the guarantee, then relevant contracts entered into after the effective date of the RTS would be brought within scope of Article 2. The parties to the relevant arrangements for the OTC derivatives then falling within the scope of the RTS would be required promptly to meet the relevant requirements.
Interposition of the CCP between clearing members (Q.6)
Q Can a CCP be authorised to provide a service that prevents its clearing members to clear contracts between each other?
A No. CCPs cannot be authorised to offer services preventing the interposition of the CCP between clearing members, i.e. preventing clearing members to clear contracts with other clearing members.
CCP paying VM in respect of an individually segregated client account (Q.8)
Q If a CCP automatically pays variation margins in respect of an individually segregated client account to the clearing member each day (auto repay), is the clearing member required to return the collateral to the client?
A According to article 39(6) of EMIR, when a client opts for individual segregation any margin in excess of the client’s requirement shall be posted to the CCP. As such, any excess collateral allocated to an individually segregated account must either be maintained at the CCP in accordance with article 39(6) or returned to the client. CCPs should offer clearing members the possibility of holding excess margin allocated to an individually segregated account at the CCP in that account (i.e. switching off auto repay), provided that the CCP can hold the currency in which the cash variation margin is denominated overnight in compliance with the CCP’s investment policy.
When variation margins are denominated in currencies that the CCP cannot hold overnight (e.g. because it has no overnight investment facilities for such currencies – typically, currencies not accepted for initial margins), consistent with CCP answer 8k, the CCP has no obligation to accommodate these currencies and the clearing member is required to return the collateral to the client, unless the latter , via a documented request, instructed the clearing member to hold the client’s repaid variation margins in a non-clearing account meeting the conditions in answer 8a.